1 Time Renang 9 points a) Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset. b) What is meant by a spot rate? c) You observe the following Treasury yield curve (all yields are shown on a bond equivalent basis). All the securities maturing from 1.5 years on are se The 0.5-year and one-year securities are zero-coupon instruments. Assume a par value of 100. Calculate the missing spot rates. d) What is the price of the four-year Treasury security? Year Yield to Maturity Spot Rate 0.5 10.00% 10.00% 9.75 9.75 9.50 9.48 9.25 9.22 9.00 8.95 8.75 8.50 8.25 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 005 2 2 8.14 7.86 7.58 7.30 7.02 6.74 6.46 6.18 5.90 5.62 5.35 5.07 4.80 1 Time Renang 9 points a) Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset. b) What is meant by a spot rate? c) You observe the following Treasury yield curve (all yields are shown on a bond equivalent basis). All the securities maturing from 1.5 years on are se The 0.5-year and one-year securities are zero-coupon instruments. Assume a par value of 100. Calculate the missing spot rates. d) What is the price of the four-year Treasury security? Year Yield to Maturity Spot Rate 0.5 10.00% 10.00% 9.75 9.75 9.50 9.48 9.25 9.22 9.00 8.95 8.75 8.50 8.25 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 005 2 2 8.14 7.86 7.58 7.30 7.02 6.74 6.46 6.18 5.90 5.62 5.35 5.07 4.80